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Pete the Planner: Simpler investment fees? Ha! NOT

Peter Dunn
7 a.m. EDT August 24, 2014

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Peter Dunn is president of Pete the Planner, based in Carmel, Ind. His column appears weekly online and in The Indianapolis Star’s Business & Jobs section on Sunday.
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Dear Pete:

How much does it cost to invest $100,000?

— Martha

Dear Martha:

I'm embarrassed to say that my first reaction to this question was uproarious laughter.

Not because it's a bad question. I laughed because the answer to the question illuminates one of the major problems within the financial world. Laughter is the only reasonable reaction, because the justifiable tears would be too painful. The financial industry thinks it has begun to address the fee confusion problem, but it hasn't even cracked the surface.

There are four types of costs you need to concern yourself with: upfront cost, ongoing costs, "change your mind" costs and the cost of the advice.

There are two types of upfront charges: sales charges and trading costs. Mutual funds with upfront charges are called loaded funds. Loaded funds can either charge you an upfront sales charge, a sales charge when you sell, or an increased internal annual fee.

Trading costs are usually associated with stocks, bond or ETFs. The fees associated with trading these types of securities have decreased significantly in the last decade, due to online brokerage accounts such as ETrade and TD Ameritrade. Trading costs are generally the smallest type of fee you will pay, assuming you are investing $100,000 in one fell swoop.

You may not like the investments you purchased, Martha. You may want to change your mind. There may be a fee for that. Financial professionals call these "change your mind" fees, contingent deferred sales charges or surrender charges. Change your mind costs can be very nasty. Some surrender charges on annuities can reach 15 percent. That means if you move your $100,000 out of the annuity, you will lose $15,000.

And finally, you may pay fees for the advice you receive. Investment advisers often charge fees for "managing" your money. The fees are based on the value of your investments.

As straightforward as these fees may seem, they often elicit many questions of value. A financial adviser may charge you somewhere between .40 percent to 1.5 percent of your account value on an annual basis to help you pick your investments. But what does "manage" your money mean? It can include all sorts of services such as market timing (strangely enough), rebalancing, financial planning services and tax harvesting. When you choose to pay for investment advice on your $100,000, you are making the decision that expert advice is worth the additional ongoing cost of $400-$1,500 every year. Again, the management fees are on top of the other investment expenses.

So, Martha, do you see why I laughed/cried? You want to know the best part of this? I probably forgot about five or six different fees. Peter wept.

Have a question for Pete the Planner? Email him at pete@petetheplanner.com or visit petetheplanner.com.